Luhs Hypermarket has a pickup truck that it uses to deliver the online orders to their...

  

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Luhs Hypermarket has a pickup truck that it uses to deliver the online orders to their customers. The truck must be either overhauled or replaced with a new truck. The company has assembled the following information: Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (five years from now) old Truck $38,000 $26,000 $25,000 $20,000 $15,000 $12,000 New Track $$1,000 $18,500 $10,000 If the company keeps and overhauls its old delivery trock currently in use, then the track will be usable for five more years. If a new track is purchased, it will be used for five years, after which it will be traded in with another track. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above The company computes depreciation on a straight-line basis. All investiment projects are evaluated using a 9% discount rate. Use the following tables to determine the appropriate discount factor(s). Required: 1. What is the net present value of the "keep the old truck" alternative" 2. What is the net presem value of the "purchase the new truck" alternative? 3. Should Lulu Hypermarket keep the old truck or purchase the new one? Why? EXHIBIT 14B-1 Present Value of $1; Table Summary: Table of present values of $1. Periods are listed in first column: 1-30 and 40. Columns are given for percents from 4 percent to 25 percent. Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24 % 25 % 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0,624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 0.855.0.8230.792.0.763.0.735.0 708 0.683.0.659.0.6360.613.0.592.0.572 0.552.0.534.0.516.0.499 0.182.0.467 0.451.0.437.0.423.0410 1 2 3 Luhs Hypermarket has a pickup truck that it uses to deliver the online orders to their customers. The truck must be either overhauled or replaced with a new truck. The company has assembled the following information: Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (five years from now) old Truck $38,000 $26,000 $25,000 $20,000 $15,000 $12,000 New Track $$1,000 $18,500 $10,000 If the company keeps and overhauls its old delivery trock currently in use, then the track will be usable for five more years. If a new track is purchased, it will be used for five years, after which it will be traded in with another track. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above The company computes depreciation on a straight-line basis. All investiment projects are evaluated using a 9% discount rate. Use the following tables to determine the appropriate discount factor(s). Required: 1. What is the net present value of the "keep the old truck" alternative" 2. What is the net presem value of the "purchase the new truck" alternative? 3. Should Lulu Hypermarket keep the old truck or purchase the new one? Why? EXHIBIT 14B-1 Present Value of $1; Table Summary: Table of present values of $1. Periods are listed in first column: 1-30 and 40. Columns are given for percents from 4 percent to 25 percent. Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24 % 25 % 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0,624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 0.855.0.8230.792.0.763.0.735.0 708 0.683.0.659.0.6360.613.0.592.0.572 0.552.0.534.0.516.0.499 0.182.0.467 0.451.0.437.0.423.0410 1 2 3

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